EM could be ‘collateral damage’ in trade war

The existence of regional supply chains could mean emerging markets, not just China, will bear the brunt of any future US tariffs, says Principal Global Investors.

In a post on the Principal Global Investors’ website, global investment strategist Seema Shah noted that the narrative of ‘synchronised global growth’ had given way to “widening regional differences”, with US having done “much of the heavy lifting” and Europe “disappoint[ing]”.

“Emerging markets have failed to live up to their early-year potential. Unfortunately, it looks like things are about to get worse for emerging markets,” Ms Shah wrote.

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Markets have ebbed and flowed alongside the US and China’s declarations of tit-for-tat tariffs.

“Not only does the latest round of tariffs negatively impact China’s growth outlook, but it also affects the rest of the Asia region via the integration of global value chains,” Ms Shah wrote.

Even though the tariffs were targeted at goods that completed assemblage in China, she pointed out that the “nature of the tightly integrated supply chains” meant a lot of the materials were sourced from nearby countries such as South Korea and Taiwan.

However, since China did not import enough goods from the US to match the tariffs dollar for dollar, China was “therefore likely to resort to bureaucratic forms of retaliation on American companies operating in China” and hit back in the form of customs delays, tax audits, and heightened regulatory scrutiny, according to Ms Shah.

“There would be other losers though. China would likely see capital outflows accelerate, global markets would be spooked, and emerging Asian economies that trade and compete heavily with China would feel the greatest reverberations,” she wrote.

“Whichever way you turn, emerging Asia comes under the greatest pressure.”

The trade conflict’s other casualties

In Principal Global Investors’ latest Economic Insights, senior economist Robin Anderson said that the escalating trade tensions had also resulted in renegotiations of NAFTA.

“Aside from trade action with China, there are other tensions simmering,” Ms Anderson said.

She pointed out that President Trump had announced he would go ahead with implementing steel and aluminium tariffs on the EU, Canada and Mexico, countries that the US exports “much more” to.

Furthermore, if Mr Trump’s recent threats to impose 25 per cent on imported vehicles were to become a reality, the effect of this would be “just as impactful, if not more so, than tariffs on Chinese goods”.

“Autos make up 14 per cent of total imports versus China’s 15 per cent. The auto supply chain is highly integrated with 35 per cent of the value of US auto exports containing imported parts,” Ms Anderson wrote.

“The more integrated the supply chain, the more risk there is of broader disruptions from any trade restrictions.

“The threats of auto tariffs plus steel and aluminium tariffs have likely made NAFTA negotiations more difficult to boot.”